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Get Ready for the Fall

The bigger they are, the harder they (might) fall.

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a hot stock just before it takes a nosedive.

Every day, MSN Money publishes a list of stocks whose shares have just hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. On our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner. But what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the 52-week high list as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 115,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Companies are selected from the "New 52-Week Highs" list published on MSN Money on the Saturday following close of trading last week.One-year ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.^Danvers Bancorp IPO'd in January 2008 at an offer price of $10 per share.

"Everybody loves a winner"Well, maybe not everybody. As it turns out, the only winner on today's list that's getting any love at all is International Bancshares. With a recommendation from Motley Fool Hidden Gems, and a five-star rating on CAPS, this is one stock that's dodged the banking-meltdown-bullet quite nicely.

In contrast, the other stocks making the list seem considerably the worse for wear after long ascents to their respective 52-week summits. All four of them receive below-average ratings of one or two stars. Zeroing in on the two worst-rated stocks, though, our choice of which to highlight this week is made easy by the fact that none of the 11 CAPS members who've rated Arrow Financial a likely underperformer has bothered to tell us why it's so bad. (Want to be the first? Here's your chance.)

Nearly two years ago, CAPS member less1buck raised a host of objections to AMREP. One point that sticks out as still pertinent today is this: "Short sales are on 50% of float." Things are no longer quite that bad, but the current short interest is sitting north of 35% -- still not great.

evillate commented back in April that AMREP: "Has been pumped up and ready for the dump. After looking at the financials, it has no reason to go this high. It is involved in REAL ESTATE and MAGAZINE BUSINESS. Both which are basically dead right now. Internet took over magazines and real estate is just awful right now."

That echoes a sentiment penned in November by CAPS All-Star hondo928: "Print is moving online, and housing is moving down, they won't have companies buying their tracts unless they have money to spend, which makes me think AMREP's turnaround will lag the housing crisis. Not in a good situation."

"Not a good situation?" Now there's an understatement. I shudder at the thought of what "lagging" the performance of companies like Lennar(NYSE:LEN) and Ryland(NYSE:RYL) might entail. Nor are AMREP's financials encouraging as they stand. The P/E north of 26 -- for a stock that's been growing its profits at less than 17% annualized over the past five years -- is somewhat worrisome.

That said, in fairness to AMREP, I must point out that the company has a clean balance sheet, and generates more free cash flow than its GAAP financials let on. Free cash flow for the past 12 months has approached $20 million, which gives the stock a price-to-free cash flow ratio of about 17. To me, this is too high a price to pay for the business. But so long as the cash flow holds up, and AMREP eschews taking on more debt than it can service, I do not necessarily think the stock must fall.

Fool contributorRich Smithdoes not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 487 out of more than 115,000 members.International Bancshares is aMotley Fool Hidden Gemsrecommendation.The Fool'sdisclosure policylikes candy apples.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.